‘Catastrophic’ German business sentiment sinks to record low

Sentiment at German companies in the coronavirus era was described as “catastrophic” on Friday, as the Ifo Institute reported a record low in its business climate index.

The index plunged from 85.9 points in March to 74.3 points in April, the Munich-based researchers said.

“This is the lowest value ever recorded, and never before has the index fallen so drastically,” Ifo president Clemens Fuest said in a statement, adding that the pandemic was “striking the German economy with full fury.”

Business sentiment was hit even harder than forecast. Economists had expected a drop to 79.7 points this month.

The closely watched Ifo business climate index is based on monthly surveys of around 9,000 firms in manufacturing, the service sector, construction, wholesale and retailing. A value of below 100 points to a negative outlook.

The coronavirus crisis is making a recession in Europe’s largest economy look all but certain. It has forced politicians to try to balance the economic costs of the lockdown measures against the risk to public health.

After some progress in recent weeks, which has staved off exponential spread for the time being, the country took tentative steps this week towards gradually reopening businesses, with small- and medium-sized shops allowed to welcome back customers under certain conditions from Monday.

However, business has been slow, retailers said.

“Revenues lag far behind the previous year’s figures,” the German Retail Association said on Friday. “Despite opening up, only an average of 40 per cent of the normal business volume is being reached.”

The figure was based on a survey of 767 retailers nationwide.

The German government has introduced a number of measures to support businesses, including freeing up an initial 600 billion euros to support larger firms and opening up an unlimited line of credit for small businesses and self-employed people.

It has also revived its so-called short-time work scheme, last used during the 2008/09 financial crisis, to help companies keep workers paid.

The number of companies relying on the scheme, in which the government tops up salaries of workers whose hours have been cut, is expected to be much higher this time around, with the Nuremberg-based Institute for Employment Research (IAB) estimating that 2.5 million workers will be affected this year.

In a report released on Friday, the institute forecast that the German economy will shrink by 8.4 per cent this year.

The chairman of the German Council of Economic Experts, known as the “wise men,” warned the government against being overly generous in its bid to keep businesses afloat.

“You get the impression that every branch wants specific support,” Lars Feld told the Handelsblatt business daily.

Earlier this week, Merkel’s coalition agreed to slash value-added tax on the beleaguered restaurant sector from 19 per cent to 7 per cent for one year from July 1.

Meanwhile, Germany’s all-important automotive sector is calling for premiums to encourage new car sales.

“This could go on almost at random,” Feld argued, saying that he worried about the country being able to begin lifting the aid measures again and at some point “return to normal.”

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